Gage Growth deal a good one for TerrAscend, says Beacon

Beacon Securities analyst Russell Stanley likes the look of the new acquisition by TerrAscend (TerrAscend Stock Quote, Chart, News, Analysts, Financials CSE:TER), reiterating his “Buy” rating and target price of C$16.00/share in an update to clients on September 1.

Founded in 2017 and headquartered in Mississauga, TerrAscend is a North American cannabis operator with vertically integrated operations in Pennsylvania, New Jersey and California, along with licensed cultivation and processing operations in Maryland and licensed production in Canada.

Stanley’s latest analysis comes after TerrAscend announced a definitive agreement to acquire Michigan-based cannabis operator Gage Growth Corp. for $545 million in stock, which Stanley expects to close in the first half of 2022 pending approval from both shareholder bases. (All figures in US dollars except where noted otherwise.)

“The purchase price equates to $2.11/sh or C$2.66/sh, representing a modest 18 per cent premium and a very modest premium to the mid-August high of C$2.55/sh,” Stanley said. “GAGE shareholders would own just under 20 per cent of the combined company.”

The deal would mark TerrAscend’s entry into the Michigan market, which had legal sales of $171 million in July, according to Stanley, putting it on a $2 billion annual track with potential to double should Michigan consumers reach a similar spend per person ratio to those in Colorado.

Stanley views the acquisition as reasonably priced, as recent second quarter reports from Gage put the company’s expected value at $531 million, which would mark a 6.0x multiple of the consensus 2022 EBITDA projection of $88 million, and a 4.2x multiple on the 2023 EBITDA projection of $123 million.

“The acquisition of Gage expands our footprint to the third largest cannabis market in the U.S.,” said Jason Wild, Executive Chairman of TerrAscend in the company’s September 1 press release announcing the acquisition. “Combining our market-leading share in our existing states with Gage’s proven cultivation, retail, and marketing capabilities, creates one of the largest and most dynamic companies in the industry. We look forward to leveraging Gage’s profound connection with Michigan’s consumers, in addition to its established partnerships with award-winning brands like COOKIES, to provide our patients and customers with best-in-class product offerings and retail experiences.”

TerrAscend reported its second quarter financial results on August 19, headlined by a 72 per cent year-over-year increase in net sales to $58.7 million while posting EBITDA of $24.3 million for a year-over-year increase of 189 per cent and an EBITDA margin of 41.4 per cent.

The company has stayed busy since announcing its quarterly results, announcing the East Coast launch of its Valhalla Confections edible brand to its New Jersey Apothecarium dispensaries located in Maplewood and Phillipsburg. The move came shortly after the company increased its ownership in its New Jersey license from 75 to 87.5 per cent after purchasing the additional equity from BWH NJ and Blue Marble Ventures for an initial cash payment of $25 million, with an additional $25 million in cash and TerrAscend common shares to be paid by December 31.

Stanley expects continued growth in the company’s financial projections, as he forecasts $240 million in revenue for 2021, marking a potential 62.2 per cent year-over-year increase before a substantial jump to $693 million forecast for 2022 once Gage is integrated into the company, which would represent a potential 189 per cent year-over-year increase.

He also expects EBITDA to more than double in 2021, with the $94 million projection coming in at a potential 109 per cent year-over-year increase to produce a projected margin of 39.2 per cent. The Gage acquisition also provides a significant boost to Stanley’s EBITDA projections for 2022, as the $309 million projection would mark a year-over-year increase of 229 per cent, with the margin rising to 44.6 per cent.

Stanley sees the valuation data working in TerrAscend’s favour moving forward, forecasting the EV/Revenue multiple to drop to 11.5x in 2021 from the reported 2020 figure of 18.7x, with a further drop to 4x forecast for 2023. The EV/EBITDA multiple follows a similar track, with Stanley forecasting a drop to 29.4x in 2021 from the reported 62x in 2020, followed by a further drop to 9x in 2022.

Stanley believes the deal will positively benefit all parties involved upon its closing.

“We understand it has a strong local consumer following, in part because of exclusive licensing partnerships in MI, including COOKIES,” Stanley said of Gage. “We understand TER plans to leverage GAGE’s strain portfolio (40+ strains) as well as its branding/marketing approach in TER’s other markets.”

Currently trading in the C$8.00-C$9.00 range, TerrAscend’s share price is down 32.9 per cent for the year to date, and 56.7 per cent since February 10 when it reached a high point of $19.97/share. At press time, Stanley’s C$16.00 target represented a projected one-year return of 85 per cent.